Procurement in Advantageous Position for IBM

November 22, 2013 at 4:42 AM

Its name is synonymous with computing, and it’s as ubiquitous with mainframes as Apple is with every gadget that begins with the letter “i”. It is literally among only a handful of the more than 100 iconic U.S. corporations that existed at the turn of the 20th century and still viable; according to Forbes magazine, Big Blue and five other companies are all that’s left standing from the top 25 companies on the Fortune 500 in 1961.

For more than eight decades, IBM ruled the mainframe computing industry, and all too briefly in the 1980s, the burgeoning personal computing industry. But Big Blue took an epic fall the following decade.

Ironically, it was the PC explosion that nearly killed IBM. According to a recent Forbesarticle marking the company’s centennial, IBM was hemorrhaging by 1993, losing over $8 billion the previous year – more money than any American company in history. Some observers blamed the fall on IBM’s stodgy, top-heavy bureaucracy, which prevented the company from competing on a level playing field with much smaller, emerging competitors. Nearly 15 years later, IBM had sold its PC business to a Chinese company called Lenovo.

Looking back on the tsunami, IBM itself recognizes it needed to change. The advent of the Internet had accelerated globalization and the world had become significantly more interconnected and intelligent as a result, the company acknowledged in a recent white paper.

Virtually nothing IBM did was immune from the remarkable transformation that took place over the next 15 years, including procurement operations. At the time of its near-fatal experience in the early 1990s, nearly 80% of the company’s highly decentralized procurement organization was transaction-focused and nearly myopic when it came to such things as strategic sourcing, according to IBM.

IBM procurement teams were stationed in more than 100 countries, “all operating in disparate ways and utilizing different systems,” the company noted. IBM learned quickly that its future relied heavily on that organization.

Over the next few years, the company transformed its procurement arm by centralizing and standardizing processes, hiking spend compliance, establishing common processes for sourcing, contract management and transactions, and beefing up supplier intelligence.

In 2006, IBM took a surprising, though no less logical, step in moving its global procurement operations to Shenzhen, China, to better focus on the emerging global markets. It was the first company business unit to be located outside of the States. Six years later, the global procurement arm moved again – this time to Budapest, Hungary.

IBM’s procurement operations have gone from functional, geographic silos to a centralized, horizontally integrated organization. Its people have been transformed from generalists to highly skilled specialists. And it capitalizes on using global and smarter technology today.

Today, IBM is as vibrant and viable as it ever has been. It refers to itself now as a “global services and solutions provider,” and for good reason. While its stalwart core business remains solid (installed mainframe capacity has increased ten-fold over the past 13 years), IBM today is a giant in the field of outsourced procurement services for companies around the world. For example, IBM manages more than $1.2 billion of indirect spend per year for electronics manufacturer Solectron, and helped $3 billion retailer Rent-A-Center streamline and automate its procurement operations.

All told, IBM’s procurement staff manages more than $57 billion in spend, nearly half of which is for its clients around the world. Nearly the same proportion of its procurement staff – 80% – are focused on strategic sourcing issues instead of transactions. Their work has been credited with helping save the company more than $7 billion a year.

IBM today is one of the five largest technology companies in the world and is near the top of the lists of most respected and admired companies on the planet. In a word, integration is the biggest reason for Big Blue’s turnaround and success.

At the center of that success is John Paterson, whose 36-year career at IBM has culminated in his current job as the company’s Chief Procurement Officer. His prior work includes leadership roles in global production procurement and process reengineering, as well as a number of management and executive positions in manufacturing, development and procurement in the U.S. and Europe. In addition to helping orchestrate procurement’s transformation, Paterson is credited with a number of achievements, including his innovative use of information technology.

My Purchasing Center recently sat down with Paterson to discuss that transformation, and how IBM’s procurement organization has helped bring the company into the 21st century.

IBM hit some very difficult times a few years back. And you have a unique perspective because you were there at the time. What role did procurement play in the turnaround?

Up until the point IBM had these financial difficulties back in 1990s, it was essentially a vertically integrated hardware company and had been for many decades prior to that. Being vertically integrated and spending a huge amount of resources on research, development and manufacturing, its dependency on external suppliers was somewhat limited. Consequently, procurement at IBM was much more of a back office organization. It was decentralized with about 100 discrete purchasing groups across the country all basically doing their own thing. When we ran into difficulties, a couple of things happened.

First, we needed to look very carefully at everything that went on in the business from a procurement standpoint as we tried to leverage ourselves much more effectively in the marketplace. Second, with the emergence of the PC era, we started to move from being a vertically integrated organization to one that became more reliant on external suppliers for goods and technology. We knew procurement should and needed to play an important role.

As the company has evolved over the past 15-20 years, so has procurement. We’ve gone from being a vertically integrated hardware company to a highly evolved services company while still producing a large volume of hardware. Today, we are much more integrated with external supply chains and much more dependent on the integration of suppliers’ capabilities and offerings into the solutions that we’re developing and providing to our customers around the world.

Consequently, procurement’s role has changed enormously over that time. We are no longer the back office administrative organization we once were. We’ve become very clearly visible now as an organization that can add value. I often say that we sit in a very advantageous position in procurement in that we have visibility to the capabilities of thousands of very smart companies around the world and we therefore have a responsibility to bring those capabilities and offerings to IBM internally to see what value we can create and generate from them. So it’s been a big transformation.

Did moving the office of Chief Procurement Officer to Europe impact your business in the U.S.?

It didn’t affect the way we do procurement in the U.S. It affected the way we did procurement overall, however. The logic for moving initially to China was to accelerate the development of the supply base in Asia Pacific, not just in China, and to accelerate the development of our people to take on broader and more global roles. As IBM has become much more of a global enterprise over the past 10-15 years, our supply base has also become much more global. That creates a lot of opportunities, not only for the company, but procurement professionals within the company to broaden their capabilities, their view and visibility into global supply chains.

In what ways is IBM innovating in the area of procurement, sourcing, supply chain, etc.?

IBM’s philosophical approach to procurement is very much based on long-term relationships. If you look at our supply base, you’ll find we buy from a relatively small number of companies. And we’ve been with those companies for a long time. As a consequence of that, we have spent and continue to spend a lot of time and energy in developing the capabilities of our suppliers. And it’s very much an integral part of our strategy around procurement, and our operations around procurement. We do that from a technical standpoint, from a process standpoint, a management system standpoint and I think we’ve done a great deal, for example, in the area of e-procurement and electronic commerce across the supply chain that’s helped not just us, but a lot of suppliers.

I think we’ve helped many of our suppliers from a social and environmental standpoint in terms of the requirements they need to fulfill not just to be a supplier for IBM but increasingly to be suppliers to global companies. We look at these as significant investments. For example, in the U.S., we remain the largest single buyer from minority suppliers in our industry. We evolved that program to being a global program and now we have minority supplier programs throughout the world. There are many examples of how we’ve helped suppliers, but there are also just as many examples of how suppliers have helped us.

What innovations and achievements of yours are you most proud of at IBM? What impact did they have?

I think the whole electronic enablement of our supply chain with 25,000 suppliers around the world was something that was unique and still may be. I’m not sure there’s another company that’s as electronically connected to their supply chain partners as we are. It’s been that way for many years.

Another achievement is being able to demonstrate that in a globally integrated enterprise, as many companies are today, key jobs can be done from any part of the world. There’s a great tendency among companies to keep leadership positions very close to the core of the enterprise. While that may bring some advantages, it also has lots of limitations, particularly from the procurement side. We need and want to understand the capabilities of a vast network of suppliers around the globe. And I think we’ve been able to demonstrate that, despite a long history of being a U.S. company, these things can done quite effectively from other parts of the world.

What kinds of procurement challenges most occupy your day?

I think we all are challenged daily by the basics of procurement – getting goods and services to the right people, with the best quality and on time. That’s never going away.

But I think there are some other more general challenges around the area of globalization of supply chains, which I think has brought enormous benefit to companies around the world but also bringing lots of risks, some of which weren’t understood when initial sourcing decisions were made. Those risks are political in nature. There’s always the threat of unrest in certain parts of the world, there are geophysical calamities like the tsunamis in Japan or the floods in Thailand. All have very significant potential impact on supply chains.

There also are reputational risks, which I think are something more and more companies, especially western companies, are spending time on in the procurement space. Social responsibility and environmental management in our supply chains is an area that we as a company spend a lot of time thinking about and working on internally.

Another area is skill. Over the past 10 years or so, procurement generally has moved from being a back office operation to one that is genuinely seen by many companies as a source for competitive advantage. That places a great deal of focus on skills. And developing, retaining, finding skills in markets around the world is something that becomes more challenging.

Yet another area that occupies a lot of my time and which I derive a great deal of satisfaction from is actually in selling. We sit in a unique position here at IBM procurement in not only being a provider of procurement services to the IBM company but also many companies around the world, so that gives me enormous pleasure. It gives me great visibility into what’s going on in many companies and supply chains and I spend a sizable proportion of my time in that space. We have about 50 companies around the world we provide procurement services to.

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